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THE PROBLEM OF WORKING CAPITAL MANAGEMENT IN THE MANUFACTURING INDUSTRIES IN NIGERIA: A CASE STUDY OF EMENITE LIMITED

CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND OF THE STUDY

The term working capital originated with the old iankee peddlers, who would load up his wagon with goods and then go off on his route t o peddle his wares. The merchandise was called working capital because it was what he actually sold, or turn over” to produce his projects. He generally owned the rvagon around horse, so that they were financed with ‘equity’ capital, but he borrowed the funds to buy the merchandise these borrowings were working capital loans, and they had to be repaid after each trip to demonstrate to the bank that the credit was sound.

If the peddler was able to repay the loan, then the bank would make another loan. From this, working capital is conceptualized as the provision of sufficient current assets that will be able to sustain the normal process of acquisition of raw materials and supplies, turning out the finished product and collection of payments. Working capital management deals with the determination of the ratios at which to hold the current assets and current liabilities in the overall valuation of the firun. Working capital broadly refers to current assets and current liabilities.

Net working capital is the deduction of current liabilities from the current assets. Therefore, working capital is one of the most strategic asset holdings of firms. It is a circulating capital which flows and changes form as the firm pursues its goals and performs, its operation it is a financial lubricant or life stream for the firm and maintains constant process of circulation throughout firm. Current assets as the gross working capital, therefore, represent those assets that can be converted into cash within an accounting period.

Current assets are constantly varying in the life of a firm i.e it changes from cash to inventions, to receivable and then back to cash. If a lot of funds are field down in the form of current assets, it will constitute a problem to the management as there may be little or no fund for the other operational sectors. The purpose of the research is to assess the problem of working capital management in the development of manufacturing industries in Nigeria. In order to accomplish this study, Emenite Nigeria limited has been selected as a case organization.

1.2   STATEMENT OF PROBLEM

In Nigeria today, some manufacturing industries are facing obsolescence, deterioration, pilferage, mishandling, high insurance and carring cost, idle funds and accounts receivable due to unnecessary accumulation of inventories. This study is arming at finding whether there is excessive working capital. Also, some manufacturing industries in Nigeria, are facing the problem of independence due to liquidity problem. This study is aiming at finding also whether there is in sufficient working capital available to manufacturing industries in Nigeria. Moreover, some are facing the problem of stagnation and sluggish rate of return on investment. This study is also aiming at finding whether there is more availability of working capital to undertake profitable investments.

1.3  OBJECTIVES OF THE STUDY

In this study, the research in tend to achieve the following objective.

1. To discuss how working capital are managed in manufacturing industries in Nigeria.

2. To discuss the problems of working capital management in the manufacturing industries Nigeria.

3. To highlight the damages of poor management of working capital in manufacturing industries in Nigeria.

4. To find how inventory could controlled and managed in the manufacturing industries in Nigeria.

5. To ascertain how indebtedness could be managed in manufacturing industries in Niger.

1.4   SIGNIFICANCE OF THE STUDY

This work will be very useful to the managers, directors, and financial analysts and students in financial schools. It will enable the managers in the manufacturing industries to know how to manage working capital properly. Management, through this research could evaluate the profitability of working capital management that is to know whether the revenue for gaited by way of working capital management are justifiable or otherwise. In other words, it will enable management to know whether working capital management have actually helped to redirect investment pattern, bankruptcy, idle funds, unnecessary accumulation of inventories, stagnation, sluggish rate of return on investment, and short term maturing objections of the management towards the development of manufacturing industries I Nigeria. This study will also enable management to compare the effect of the different areas of working capital management in other t o identify those that are profitable to the management and manufacturing industries. This study will serve as a good reference material to students of financial schools, who may wish to throw more light on this particular project topic.

1.5  SCOPE AND LIMITATIONS

For the purpose of this study, the researcher will restrict himself to the management of working capital in the manufacturing industries in Nigeria with particular reference to Ememite Nigeria Limited as a case study. Also the time allowed for this research was too short considering the fact that the research covers a broad area.

1.6   DEFINITION OF TERMS

ASSETS: According to the oxford advanced learner’s dictionary, “Asset” is defined as a thing of value, especially property, that a person, or a company owns, which can be used or sold to pay debtors.

EQUITY CAPTIAL: This is the capital owned by the owner of a company.

GROSS WORKING CAPITAL: This is the totality of firms investment in Current Assets such as inventory, account receivable , short-term marketable securities and cash.

INVESTMENT: This refers to economic activities designed to increase, improve or maintain the productive quality of the existing assets.

CAPITAL: A stock of money, possed by a person or firm which may be invested from time to time in order to cam income which is intended to be diminished.

INDUSTRY: The Award illustrated Dictionary (C02A), defined “industry” as a branch of trade or manufacture, especially one employing much labour and capital, infact, manufacturing in general.

MANUFACTURE: The same dictionary defined “manufacture as making of articles by physical labour or machinery especially on large scale, branch of an industry.

NET WORKING CAPITAL: This is the totality of firms investment in current assets les the totality of the firms current liabilities.

MANAGEMENT: This is the application of human and material resources to achieve the objectives of an organization effectively and efficiency.

FINANCE: This deals with the ways business man’ investors, government, financial institutions, individuals and families handled money.

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